A LONG-HELD idiom of the resources industry is that it's cheaper to build a mine than buy one. The experiences of three Chinese-backed companies pushing into Australia show that is not always the case.
Citic Pacific, Minmetals Resources and Yanzhou Coal Mining have made significant investments in the Australian mining sector in recent years.
Minmetals and Yanzhou went down the acquisition path in 2009, with Minmetals born out of an opportunistic $1.7 billion move on the assets of the then-crippled OZ Minerals, and Yanzhou snapping up coalminer Felix Resources for $3bn.
In contrast, Citic took the conventional path, committing back in 2007 to building a huge magnetite iron ore mine in Western Australia's Pilbara region.
The three companies have faced challenges since moving into Australia, but it is Citic that arguably has experienced the most severe headaches as a result of its strategy.
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Citic was grilled over the progress of its Sino Iron magnetite development when the company announced its interim results in Hong Kong recently, following another round of cost blowouts and delays.
Despite bringing to the development Chinese financial backing and an experienced Chinese contractor in China Metallurgical Corp Group, the development of Sino Iron has proved particularly problematic.
The final cost is now set to be about $US6.1bn ($5.76bn) -- about $1.7bn higher than first thought -- and first production will come almost two years later than first expected.
Further compounding Citic's issues are the two new taxes the project will be saddled with. There was no mineral resources rent tax or carbon tax in Australia when Sino Iron was approved, but the mine will be slugged by both imposts when it comes into production. Citic insists the project will still generate "considerable" returns.
At the Citic results presentation, chairman Chang Zhenming and managing director Zhang Jijing stressed they were "doing our very best" to finally bring Sino Iron on stream. "Not just Citic Pacific but the entire Citic group, and indeed the country, China itself, is highly cognisant of the progress of the project," Mr Chang said.
While Citic's peers in Minmetals and Yanzhou have enjoyed strong cashflows from the producing mines they acquired, there are worrying signs Sino Iron may come into production just as the market for iron ore is turning for the worse.
Citic also produces steel and has property investments, and Mr Chang warned of mixed outlooks for both sectors. Steel orders in the past few months were lower than they were at the start of the year, he said, while the pace of property sales in China had slowed. Neither phenomenon, if continued, would bode well for the demand for Citic's West Australian iron ore production. On top of that, the company is dealing with a police investigation into a $HK15bn unauthorised bet on the Australian dollar that went wrong in 2009.
In contrast, Minmetals and Yanzhou have bedded down their Australian acquisitions and are looking for more. Former OZ Minerals and WMC Resources chief executive Andrew Michelmore now heads Minmetals, and at the company's results last week set an aggressive target of growing the company into a $US20bn mid-tier miner over the next five years. Given Minmetals is currently worth about $US2.8bn, it is quite a goal.
Minmetals' core issue in the eyes of investors is a perceived lack of material upside in its existing portfolio. While its Dugald River zinc-lead-silver deposit near Mount Isa looks certain to go ahead, the mine will effectively replace output from its soon-to-be-shuttered Century operation. A 100,000 ounce per annum goldmine will be added to its Sepon copper mine in Laos, but it is not the material step-change in output that would get investors excited.
Mr Michelmore is confident Minmetals can grow through exploration and development, but achieving that targeted growth looks difficult without further acquisitions.
Mr Michelmore said he would be prepared to carry a debt-to-equity ratio of 70-30 in order to pursue the right acquisition -- a ratio that would scare most Western miners but which is digestible for Minmetals thanks to cheap finance available from China. Minmetals' majority shareholder, major state-owned group China Minmetals, is prepared to guarantee loans to the miner. That means any debt picked up by Minmetals could attract interest rates in the realm of 2-2.5 per cent.
Minmetals has demonstrated its capacity before, having made a $US6.5bn offer for copper miner Equinox Minerals earlier this year.
Likewise, Yanzhou Coal is adamant it is on the hunt for more acquisitions, with Australia a top priority. Yanzhou is the listed arm of China's fourth-largest coal producer, Yankuang Group, and is aiming to triple its coal sales by 2015. It continues to reach for more assets overseas to help it triple sales to 150 million tonnes by 2015.
Speaking at the company's results last week, chief financial officer Wu Yuxiang said the company was looking for up to 20 million tonnes of additional capacity in Australia. "We will be looking for new opportunities of acquisition in Australia, Canada and also any other coal-related businesses," Mr Wu said.
Interestingly, out of the trio, it is Citic which would appear to have the most immediate M&A opportunities on its plate. US coalminer Peabody Energy is bidding for Queensland miner Macarthur Coal, in which Citic has a 24 per cent stake, and there have been repeated rumours that Citic might look to make a competing bid. The question is whether, after its costly foray into Australian mine construction, it can secure the firepower needed to support an offer.
Source:bloomberg